Political turmoil pushes sterling towards one-month lows

LONDON (Reuters) - The British pound fell towards one-month lows on Wednesday, weighed down by a spiralling political drama in Westminster and growing doubts over Prime Minister Theresa May’s ability to deliver a good Brexit deal.

Pound coins are seen in the photo illustration taken in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/Illustration

A string of political scandals, leading to fears that May could be on track to lose a second minister from her cabinet in the space of just one week, have added to the currency’s troubles.

The future of May’s aid minister Priti Patel was in doubt on Wednesday after reports she had held several undisclosed meetings with senior Israeli politicians during a private holiday.

It risks shattering May’s already dwindling authority, following a sexual harassment scandal that engulfed parliament last week and led to high-profile resignations.

“Traders are pulling out of the pound rapidly,” said Dennis de Jong, managing director at UFX.com.

“With her cabinet in disarray and pressure mounting over her job, the fate of the pound is probably the last thing on Theresa May’s mind this afternoon – but the ongoing political uncertainty is hitting sterling hard.”

The pound fell 0.6 percent to $1.3096 on Wednesday, inching closer to the one-month low of $1.3040 hit on Friday.

Against the euro it was trading 0.4 percent lower, at 88.34 pence.

Uncertainty over the progress of Brexit talks and the weak picture for the British economy despite a historic rate hike last week have kept investors frosty towards the pound.

“Despite the political headlines, markets haven’t yet started pricing in a change in government,” said Yassir Benjelloun Touimi, a portfolio manager at Dalton Strategic Partnership LLP in London.

“(But) unless there is clarity on the Brexit situation, sterling should remain weak,” he said.

The pound sold off last week after the Bank of England raised interest rates for the first time in over a decade but pushed back investors’ expectations for further rate hikes.

The central bank told investors to expect just two more hikes in the next three years, adding that even these plans were dependent on the outcome of negotiations over Britain’s departure from the European Union.

Sterling also took a hit from falling bond yields as the gilt yield curve flattened to its lowest level in more than a year. The yield spread between two- and 10-year gilts narrowed to 75.9 basis points, its lowest level since early October 2016. [GB/]

A poll by ORB International on Tuesday showed a record 66 percent of Britons disapprove of May’s handling of Brexit talks, up from 64 percent last month, with increasing scepticism that leaving the EU will make the country better off.

The poll also showed only 27 percent were confident that May will get the right Brexit deal.